The most common reason usually for refinancing is to use the equity to consolidate those high interest cards and other debts. Home mortgages will have lower interest rates than credit cards and unsecured credit, so it should lower your overall monthly budget. But it could raise your monthly mortgage payment.
Borrowing against the equity in your home will make your mortgage payments higher and will increase the term of the loan. If you are ten years into a thirty year mortgage, you will now have another ten years of mortgage payments over your current mortgage. By switching from an adjustable to a fixed rate mortgage, you will stabilize your mortgage payments and not have to face an unexpected increase in your monthly bill.
Higher mortgage payments will mean restructuring your budget and your life style. In order to stay out of debt you will have to stay within your income each month. There won’t be much to spare for extras like dining out and entertaining. Every member of the family will have to make sacrifices so that you don’t jeopardize your home with additional debt. You will need to develop and live on a monthly budget.
In order to calculate a budget, you should consider your monthly disposable income (after taxes). If you bring home $5000 you should first deduct fixed expenses like your mortgage, utility bills, car payments, etc. Make an allowance for more flexible expenses like groceries and entertainment and put anything left in savings.
People living with a refinance always look for a second job they can do weekends or at home after a long day at work. Taking a second job can make up for the $1,000 you are paying monthly. Your spending may remain the same but then you are working double time to make up for the budget gap. Or you may scrimp and save to live comfortably and without worrying about bill collectors.
Each member of the family needs to understand the budget and why they must cut spending. Have fun and come up with some ideas on how everyone can save money. Like the kids could take their lunches to school everyday instead of buying them at school. Mom could do her nails herself instead of going to the salon.
Explain to your children that they are going to have to make sacrifices now so that the entire family can have a better future. Teach about living on a budget and not always having everything they want. Don’t give in to impulse at the check out counter and spend that dollar or two. Those dollars add up faster than you may think.
It is important to include savings, a retirement plan and life insurance in your monthly budget. These costs are part of a total financial plan to secure your family’s future. The reason for getting in a position where you had to refinance your home was a lack of financial planning. Don’t make the same mistake again. Plan for tomorrow.
To repeat, during those thirty years while your refinance is in effect, live on less; give up the “expensive” good times. But then you can be creative and have inexpensive fun with your family and friends. At the end, you have your home, your retirement pension, and a secure lifestyle while you children have finished school and have lives of their own.
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